Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Q1 2019 Marvell Technology Group Ltd. earnings conference call. At this time, all participants are in listen only mode. Following management's prepared remarks, we will host a question answer session and our instructions will be given at that time. If during your conference today you require operator assistance, press star then zero and operator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Peter Andrew, Vice President of Treasury and Investor Relations. Sir, you may begin.
Thank you. Good afternoon, everyone. Welcome to Marvell's first quarter and fiscal year 2019 earnings call. Joining me on the call today is Marvell's President and CEO, Matt Murphy, and CFO, Jean Hu. Before I turn the call over to Matt, I wanted to remind everyone that certain comments today may include forward-looking statements, which are subject to significant risks and uncertainties and which could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10K and 10Q filings. We do not intend to update our forward-looking statements. During our call today, we will make reference to certain non-GAAP financial measures.
A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the investor relations section. With that, let me turn the call over to Marvell's President and CEO, Matt Murphy.
Great. Thank you, Peter. Good afternoon to everyone joining us on the call. We are here today to talk about Marvell and our strong Q1 performance in Q2 outlook. Although I will touch on the status of the Cavium acquisition, reminder is Cavium is an independent, publicly traded company, and we will not be able to comment on their financial results. Marvell delivered a strong first fiscal quarter for 2019, driven by the growth of our core businesses and continued improvement in operational efficiency. Total revenue for Q1 came in above the midpoint of our guidance at $605 million, up 6% from a year ago. Our non-GAAP gross margin continued its positive momentum and reached a record high of 62.5%. As a comparison, our revenue has grown 18% compared to Q1 2017, two years ago, while growing gross margin dollars by more than twice that rate.
Looking ahead, we expect to continue expanding our gross margin in Q2 to 63%-64% as we capture more value from an improving product mix and other margin expansion initiatives. Gross margin is a key indicator of the innovation and quality of engineering in a company, and Marvell has quickly moved into an elite level of companies within the semiconductor industry. Our non-GAAP operating margin for Q1 was 27.4%, up over five percentage points from a year ago. You may recall at our investor day in March of 2017, we set a non-GAAP operating margin target of 30% by the end of fiscal 2020. I'm pleased to report that we expect to achieve this target in Q2, six quarters earlier than we had initially projected. To be clear, we expect to achieve this on a standalone company basis.
Non-GAAP earnings per share was $0.32 above the midpoint of our guidance and up 33% year-over-year. The bottom line is that quarter by quarter, we continue to unlock Marvell's earnings potential, and in the process, we're delivering tremendous value to our customers and our shareholders. Let's move on to the performance of our core businesses. Start with storage. Our storage business exceeded expectations, growing 4% year-over-year. This growth was driven by two factors. First was record SSD revenue, which contributed more than 30% of total storage revenue. Second was the shifting mix of our HDD and SSD storage solutions as we expand in the enterprise and data center markets. This segment of our storage business grew 50% year-over-year, and overall demand continues to grow.
The storage market shift to the enterprise and data center has been a key contributor to the recent strength in our HDD business. We continue to expand our presence in this market segment and anticipate a multi-year tailwind for our HDD business as we facilitate new storage technology transitions such as HAMR, MAMR, and multi-actuator drives to increase areal density and performance, coupled with the ramp of our preamp business. We believe this strength will continue to largely offset secular declines in client HDDs. Meanwhile, at the Open Compute Project Summit in March, we announced the industry's first NVMe SSD chipsets that address emerging cloud and enterprise data center SSD requirements. These chipsets include the industry's first NVMe switch and two data center optimized SSD controllers.
These key building blocks power the largest EDSFF, NF1, and customized cloud data center form factors, new architectures that enable customers to better meet the rigorous demands of applications such as machine learning, deep learning, and advanced analytics. The NVMe switch allows operators of virtualized cloud data centers to aggregate and manage multiple SSDs to deliver high-performance storage to their end customers. The NVMe controllers support single and dual port functionality, as well as open channel architectures, which are powered by Marvell's fourth generation of NANDEdge LDPC error correction technology. This technology supports the latest 3D NAND TLC and QLC technologies and extends overall SSD lifetimes, all while maintaining best-in-class latency and performance consistency. Also, these chipsets align to the recently announced OCP Microsoft Project Denali, of which Marvell is a founding member. All right, moving on to networking.
Our networking business grew 6% year-over-year, in line with our guidance of mid to high single-digit growth. This was driven by new product momentum, particularly with our switch and PHY solutions for the enterprise campus market. In addition, we're seeing early momentum for our data center products, particularly our 100 Gig PHY portfolio, which showed strong year-over-year growth. We also sampled our first 400 Gig PHY for the data center during the quarter and are seeing strong interest for the product. Overall, our core portfolio of switch, PHY, and embedded processors grew greater than 10% year-over-year, and I'm pleased with the performance and future prospects of this business. Our automotive Ethernet business also continues to gain traction.
As I've mentioned in past calls, this business is still in its early stages, but we're already achieving switch and PHY design wins across multiple tier 1s and OEMs in the U.S., Asia, and across Europe. Recently, NVIDIA selected our secure automotive Ethernet switch for their Pegasus platform. This makes it the first commercially available solution with embedded security built into the core. The Pegasus computing platform has been designed to handle level 5 driverless vehicles. Our secure switch powers an in-car network that enables sensor fusion, cameras, safety and diagnostics while preventing cyber attacks that could compromise a safe and seamless driving experience. Marvell's leadership position is the result of our extensive OEM and tier 1 relationships, leading IP, and engineering excellence.
While automotive Ethernet is an emerging market, we are already the leading company with proven Ethernet and switch PHY products offering solutions that meet or exceed customers' EMC, EMI, security, and overall performance requirements. Automotive is a good example of edge computing, as cars are essentially becoming data centers on wheels. Looking ahead, we see numerous opportunities to promote and grow Marvell's Ethernet, Wi-Fi, and storage, HDD today, SSD in the future. Moving on to connectivity. Marvell's connectivity business grew 19% year-over-year, driven by our broad-based demand for our solutions across all of our targeted market end segments, particularly performance client and enterprise access. Our success in these high-performance market segments is the result of a shift in our strategy over the past two years. We're focusing primarily on markets that value the differentiation we deliver through our system-level solutions.
In these high-performance end markets, we are able to offer solutions comprised of processor, RF, switch, PHY, security, and software IP, which together helps customers accelerate their time to market. The solution-focused approach continues to be embraced by the market. Great example is our recently announced 802.11ax products, which have generated a very strong design win pipeline with leading tier 1 customers. Overall, I'm pleased with the performance of our core business. I'm proud of our teams for their continued efforts to position Marvell for success both now and into the future. Moving on to an update on the Cavium acquisition. First, on March 16th, Marvell and Cavium shareholders voted overwhelmingly in favor of the proposed merger. Second, the HSR antitrust process is complete, and we recently obtained CFIUS approval.
The final regulatory review approval we are waiting for is from China's State Administration for Market Regulation, SAMR, also known as the new MOFCOM. We continue to currently believe the transaction will close in mid-calendar year 2018. While the deal isn't closed yet, integration planning is going extremely well. This will enable us to hit the ground running once the transaction closes, I'm confident in the synergies we projected, $150 million-$175 million within the first 18 months, and expect to achieve $200 million over the long term. The strategic rationale of this combination is compelling. It's financially accretive, technically accretive from the addition of new product lines and IP, increases our scale, significantly diversifies Marvell, doubles our TAM, accelerates our presence in the cloud and data center market, with synergy capture, creates a best-in-class financial model.
Before wrapping up my remarks, I want to mention two other things. Forbes recently named Marvell as one of America's Best Employers for 2018. Notably, this award is based on employee feedback and is not something a company can apply for. To me, this validates the hard work we've been doing over the past 18 months to create a new company culture built on integrity and transparency, one that empowers and inspires innovation, customer focus, and rewards high performance. While tangible benefits can sometimes be hard to quantify, I do believe that most people make an extra effort when they are treated fairly and rewarded for their hard work. While our work here is never done, I'm very proud that Marvell made the Forbes list, and I'm proud to be part of this team. We recently announced changes to our board of directors.
Gerri Elliott and Peter Feld have decided to not stand for re-election to Marvell's board when their terms are up at the end of June. Gerri has joined Cisco. She's their chief sales and marketing officer, Peter decided it was the appropriate time for him to step down from the board to free up capacity to serve on other Starboard portfolio company boards. Candidly, I do not think Marvell would be nearly as well positioned to succeed today and in the future if Peter had not helped drive some hard but very necessary changes two years ago. Gerri's unique point of view has helped us progress over the last year, too. While I'm sorry to see such talented directors leave, along with Dr. Randhir Thakur, who previously announced he was not standing for re-election due to his new position at Intel, I wish them all the best.
I'm happy to welcome new directors Donna Morris and Bethany Mayer, as they're going to bring great insights from their leading roles at companies such as Ixia, HP, Cisco, and Adobe. We have a great board, I'm excited about our future. We're working very hard to build the world's next great semiconductor company, one that provides highly differentiated infrastructure solutions that help megatrends such as cloud and edge computing, AI, the explosion of data realize their full potential. It takes many talented people to achieve this vision, we are making great progress in developing a culture that will attract the best and brightest among them. I will turn the call over to our CFO, Jean Hu. Jean, go ahead.
Thanks, Matt, Good afternoon, everyone. I'll discuss the highlights for our first quarter of fiscal year 2019 and provide our current outlook for the second quarter for fiscal 2019. Revenue in the first quarter was $605 million, above the middle point of our guidance provided in March. Due to the timing of the ZTE ban, there was not an impact to Marvell's forecasted Q1 revenue. Our core business of storage, networking, and connectivity accounted for 93% of revenue and grew 7% year-over-year, slightly ahead of expectation. Storage accounted for 52% of revenue and grew 4% year-over-year, well above our guidance due to record SSD revenue and continued growth in enterprise and the data center revenue for both our HDD and SSD solutions.
Networking accounted for 26% of revenue and grew 6% year-over-year, in line with expectations, driven primarily by growth in our core switch PHY and the processor solutions. Connectivity accounted for 15% of revenue and grew 19% year-over-year. It was below our expectations as some of the expected demand got pushed into Q2. Other products accounted for 7% of revenue and declined 10% year-over-year, largely consistent with our expectations. GAAP gross margin for the first quarter was 62.1%, and the non-GAAP gross margin was 62.5%, a record level for Marvell, and an increase of almost two percentage points from last year. GAAP operating expenses were $251 million, and the non-GAAP operating expenses were $212 million, better than expected due to disciplined operating expense management and our team's continued effort to improve efficiency. GAAP operating margin was 20.7%.
Non-GAAP operating margin was 27.4%, up over five percentage points from a year ago as we were successful in continuing to drive leveraging our model. GAAP earnings per diluted share was $0.25, and the non-GAAP earnings per diluted share was $0.32. Let's now turn to our balance sheet. We ended the quarter with $1.9 billion in cash on hand, or $3.64 per share based on non-GAAP share count, and we currently have no debt. In Q1, we distributed $30 million to shareholders in dividends. As a reminder, we have not been in the market to repurchase shares due to the pending Cavium transaction. Moving to our Q2 outlook. We expect our total revenue to be in the range of $600 million-$630 million. At the midpoint of our guidance, it would represent 2% year-over-year growth.
Please note that our Q2 revenue guidance reflects the loss of approximately $7 million in ZTE networking revenue due to the current trade restrictions imposed by the U.S. government. For comparison purpose, including ZTE revenue, our Q2 2019 revenue guidance would represent 3% year-over-year growth. We expect our storage revenue to be up low to mid-single digits year-over-year. We expect our networking revenue to be up high-single digits year-over-year. If we were to include the $7 million in ZTE revenue, networking would be double-digits up year-over-year. We expect our connectivity revenue to decline in the mid-teens year-over-year, as we will not experience the normal consumer gaming ramp that would typically start in Q2.
As Matt mentioned earlier, over the last two years, we have been shifting our strategy in the business to focus on the high-performance segment of the market where customers value the differentiation we deliver. Part of the shift in strategy involves exiting low-margin consumer-based platforms. The result is an increase in design traction with growth margin improvement, despite the revenue headwinds as some consumer products ramp down. As an example, gaming in Q2 will be accounted for 8% of our connectivity revenue compared to a year ago when it represented roughly 22% of the revenue. This transition is by design, and we expect the gaming revenue to continue to ramp down in Q3. Overall, we continue to be excited by the long-term prospect of our connectivity business. We expect other revenue to decline in the mid- to high single digits year-over-year.
We expect growth margin to be in the range of 63%-64%, driven by richer product mix, continued focus on margin expansion initiatives, and the manufacturing cost discipline. We expect our GAAP operating expenses to be between $260 million and $270 million, and the non-GAAP operating expenses to be approximately $210 million. We anticipate GAAP income per diluted share in the range of $0.22-$0.26, and the non-GAAP income per diluted share in the range of $0.32-$0.36. Before I turn the call over to operator to take questions, I did want to ask that you please keep your questions focused on Marvell and our financial results. We're quite limited from legal perspective of what we can comment about Cavium's financial result. With that, we'll now open the line to Q&A. Operator, we'll take the first question, please.
Thank you. Ladies and gentlemen, at this time, if you'd like to ask a question over the phone lines, press star and then one on your telephone keypad. Everyone who's participated in today's question and answer session, we kindly ask that you please limit yourself to one question and one follow-up. If your questions have been answered and you wish to move yourself in the queue, simply press the pound key to remove yourself. Our first question will come from Timothy Arcuri with UBS. Your line is now open.
Thank you. Thank you very much. The first question, I know that you don't want to talk too much about the Cavium results, but can you confirm or comment on whether you've merged the ERP systems, or you've aligned them?
I'll take that question. On the ERP system, certainly after we close the transaction, we'll have a plan to merge the ERP system. Typically, it will take 9 to 12 months. From the integration planning perspective, we are actually actively planning the merge of the ERP system. As a lot of you know, that's an item that typically takes 9 to 12 months after we close the transaction.
Thank you, Jean. Thanks. Can you give us a sense also on the SSD? Is that in the low 30s as a % of the storage revenue, or is it more like mid-30s? Thank you.
Hey, Tim. Thank you for the question. I'm not going to give you that detailed answer. I think we said more than 30%.
That's right. Just to add the perspective, Tim, I think you weren't on the last call, but as we have sort of followed this continuum over the last six, seven quarters, it's just been constant progress each quarter. I just sort of view the quarter we just had, which was record revenue for us in SSD, as now crossing the 30% threshold. As Jean said, we've never provided that level of precision, but you should just view it as another positive data point that our mix and storage continues to improve, both in SSD as well as the content of enterprise and data center % of revenue.
For sure. Thank you so much.
Thank you. Our next question will come from Vivek Arya with Bank of America Merrill Lynch. Your line is now open.
Thanks for taking my question. For the first one, good to see the strong growth in networking, Matt. I think if I look at the Q2 guidance, it sort of like the fourth quarter of accelerating revenue. I'm curious, what's driving this acceleration, and how much legacy business is still left in networking?
Sure. Yeah. Hey, Vivek. Thanks for the question. No, it's really the new products continue to have a strong ramp, as we indicated. A number of new products that target not only the enterprise in the campus area, but as well as the data center and switch in PHY and in our embedded processor area. All three of those are doing extremely well and have been driving kind of double-digit growth on their own. Legacy continues to shrink as a portion of our total, and we had some lumpiness in it last quarter. I think, Jean, you want to give the exact number? It's in the-
It's still around the 15%.
Yeah. It's sort of maintaining in that area, but the new products are a bigger scale and are growing faster.
Got it. In the storage business, I think we have gone sort of back and forth between assuming sort of a flat trajectory for that business over the longer term versus some amount of growth, given the growth in SSD controllers and the shift to enterprise and data center. What is the right way to think about it? For example, what is the mix of the growth parts of storage now, so we can think of this as a sort of growth business rather than just flatlining from here?
Sure. I'll give you my view, and Jean can add. We've had conviction that storage for us is a grower, and we've had that conviction for some time. The model really to think about is the HDD portion, which is larger. We've been able to manage that largely flat, despite the kind of well-known secular decline in the client portion. We've more than offset that with increases in what we consider to be the higher value segment and the growing segment, which is the enterprise and nearline type of drives. That's been going on, and that trend, we think, is going to continue. As client declines, we're going to see continued growth in solutions that really enable higher levels of capacity for cold storage, and then we have this preamp product line that we believe will continue to kick in over time.
That keeps HDD in a flat type of area. Some quarters it grows a little bit, some quarters it is down, but generally speaking, it is flat. SSD, if you go back over the past four to six quarters, has been the strongest growth driver in the company, as evidenced even by this past quarter where it exceeded 30% of our storage revenue. We see the combination of those as HDD being flattish, although we are doing our best to grow it a little bit, and then having SSD layer on top with kind of the fundamental end market of data center and cloud pulling through on both segments. We continue to see it as a growth market. It has been growing for us, and we see that going forward.
Okay. Thank you.
Thank you. Our next question will come from the line of Blayne Curtis with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question, nice results. Just curious on the strength in SSDs, the record, maybe you could talk about between client and enterprise in April, maybe just talk about that transition. I know you have a lot of different growth areas in hard drives, just that transition from client hard drive SSDs, if you could just talk about your competitive position as that transition happens.
Yeah, I'll take this question. When we look at the enterprise data center versus the client, as Matt mentioned during the call, we have seen the revenue of enterprise data center grow 50% as the overall storage. That's how we look at the business. Frankly, during the last several quarters, that growth rate we have delivered either higher or similar growth rate. Overall, when you look at it, is our enterprise data center business have been growing significantly. Of course, when you look into both SSD side and HDD side, SSD side, both our client and enterprise data center business are growing. It is enterprise data center growing even faster. On the HDD side, as Matt just mentioned, the trade-off there, right, is we do see our data center and enterprise nearline business growing much faster, which offset the decline on the client side.
I think if you look at the market on the client side, everybody is predicting like 7%-10% of decline rate. I would say our business is quite consistent with that, but we have been able to offset that with the data center and the enterprise side of the business. I think that's how we look at the overall dynamics of storage market and storage business.
Okay, thanks. Jean, if I could just ask you on the gross margin, you're seeing a nice uplift. I'm assuming the wireless LAN helps with the mix. I was wondering if there's anything else contributing to that uplift.
Yeah. We're really pleased with the gross margin improvement. The team has done excellent job in execution. When we look at the guidance Q2 growth margin versus Q1, about half of that increase is from the mix. The other half actually is coming from continued margin improvement initiatives. Overall, the increase, it's really exciting.
Yeah, Blayne, this is Matt. I would just add that we've been fighting mix for the last several quarters as connectivity has outperformed our expectations in many of those quarters. Although we've been able to grow gross margin every quarter, we've kept saying, "Hey, when mix really moves our way, it should have an uplift," and it certainly did. I think that was validation that that mix worked our way in our favor. Clearly, new products are kicking in, as Jean mentioned, we've got an outstanding ops team that continues to drive manufacturing cost reductions and efficiencies on top of that, and that's how we continue to get leverage in our gross margins. We think we're extremely pleased with the progress there.
Thanks.
Thank you. Our next question will come from the line of John Pitzer with Credit Suisse. Your line is now open.
Thank you. This is Charlie Kazarian asking a question on behalf of John Pitzer. At your Analyst Day, you outlined a storage SAM CAGR of about 3% with 4% declines in HDDs and about 15% growth in SSDs. As you now gain conviction in HDDs being a little flatter to potentially up, and that's before your comment on factoring in the HDD preamps, and it looks like SSDs are growing above that target as well. Is it fair to assume there's potential for the storage market to be more of like a mid to a little bit above mid-single digit grower for you? In that same vein, how would you think about the blended growth rate for the company relative to the 6%-8% target you outlined at your Analyst Day? Thank you.
Okay. Yeah. Great, Charlie. Thanks for the question. There's a few pieces to it. The first I'd say is that since Analyst Day, we have given some qualitative updates to that model. Obviously, when we have another Analyst Day, we'll give a formal update. What we've said so far is that SSD as a market has actually increased in velocity since that time. We said 15%, then we said it's probably more like 20% plus. Depending on which portion of HDD you look at, the market at least is still in decline, and it's probably at the range we set or maybe even a little bit more, depending on the trajectory of clients. From a market standpoint, it's probably around where it was, with maybe SSD having a little bit more of an uplift.
Clearly for our business, we're tracking very well to our commitments we made at the Analyst Day, which was to, in spite of a declining HDD market, manage it to flat, which we've been able to do. In some quarters, it's actually been up a little bit and outperformed. SSDs, based on that 15% Market estimate we made, Marvell as a company has grown much faster than that. You can create your model based around that, but we continue to see storage, as I mentioned earlier when Vivek asked this question, as a growth market for Marvell. When we say 6-8 for the combined company, with the Cavium portion layered in, we're not breaking that down specifically by product line, but clearly the core Marvell, we've always thought, we could grow it and we set a target.
We've been doing 6%, kind of an aggregate on that, which includes networking and connectivity in the blend. We got an Analyst Day coming in October, and that'll be a chance where we can reset some of these models and give a better view. I hope that color is helpful to walk you through the trajectory of where we were versus where we are today.
Yeah, it was very helpful. Thank you.
Thank you. Our next question will come from the line of Karl Ackerman with Cowen. Your line is now open.
Hi, thank you for taking my questions. I guess I just kind of wanted to circle back on the SSD controller business. I think one of your competitors has been pretty vocal on winning the lion's share of new design wins for PCIe controllers, but your implicit results for your SSD business this quarter suggest you're still growing over 30% a year or well above the market. A, could you talk about the revenue opportunity in fiscal 2019 and how you see maybe your SSD business growing, as a portion of your total storage business? B, how do you think about the competitive landscape in SSD controllers? There also appears to be several Chinese controller players trying to disrupt the SATA portion of the market. Your thoughts there kind of longer term would be helpful. Thank you.
Sure. I'll give you a couple comments there. One, with respect to the competitive discussions, this is something that was maybe around two years ago with a certain competitor that was making a lot of noise, then obviously last year, that noise did not materialize. We don't comment on our competition there. We tend to look at our own business, as you point out, it's grown very nicely and in line or above our own aggressive plan. We're very well-positioned in SSD. With respect to new and emerging competitors, look, it's a lucrative market. It's a large and growing market, but it also requires tremendous engineering IP, scale, firmware, software. There's an ecosystem aspect to it as well, in particular in the cloud and the data center portion, there's a large barrier to entry just to get qualified.
When we look at our business as really the number one or two player with respect to market share, our other competitor being an internally sourced company, we think our scale really matters in this case, and it allows us to invest in next-generation IP to handle all of these different technologies that I mentioned in my prepared remarks. We're going to continue to focus on our roadmap and continue to make sure that we stay ahead, and that's been our strategy from day one here.
Yeah, to just add it to what Matt said, right? A data point. I remember six quarters ago, we said our SSD revenue would be more than 20%. We said we're going to match to toward 30% of the overall storage revenue. That's exactly what we have done, right? Despite what competitors saying is, you have seen our revenue growing significantly quarter-by-quarter, year-over-year, expansion literally during last six quarters from 20% of the storage revenue to 30%, more than 30%. Our storage business are growing. That's basically a representation how we have been growing our business.
Perfect. If I may just squeeze one more in. I'm curious if you could discuss how sustainable you think the $210 million OpEx level is beyond the July quarter. Clearly, you're working on some supply chain initiatives, revenue should grow, I think, quite a bit from here. How do I think about the OpEx level beyond the July quarter for that level? Thank you.
Yeah. On the operating expense, I really want to emphasize is since during last two years, right, we're laser-focused to build a very efficient operating model. The team really has been increasing efficiency across R&D functions and SG&A functions. This operating expense level, when you compare to a year ago, we grow revenue, we actually reduced our operating expense level. The whole company is much more efficient today compared to two years ago. I think going forward, we actually see we're going to continue to keep at this operating expense level. We are investing R&D and the talent, we're making the company more efficient. This is the level we're comfortable right now.
Thank you. Our next question will come from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Thanks for letting me ask the question. On the connectivity side, Matt, you talked about some of the push out, from what you expected in the April quarter to now be in the July quarter. Can you just talk about it? Is that still benefiting things, the decline year-over-year, and it seems like sequentially is just that gaming business going away? Just wanted to know some of the puts and takes in the guidance there, please.
Hey, this is Jean Hu. I'll take this question. When you look at the wireless revenue, there are lots of puts and takes. I remember last quarter, we did say one of our large customers had a really unusual high forecast. Some of the forecast did not materialize, so it pushed into Q2. Q2, we do have the gaming revenue coming down quite significantly, continue to go down in Q3. That's just different trade-offs over the quarter. Overall, I think we give you an idea about the gaming ramping down and as percentage of connectivity revenue. Put gaming and the low-margin consumer business aside, we do see our enterprise access, automotive, and the other businesses continue to grow going forward.
I would just add, Ross Seymore, that this is a business where we've been able to significantly improve the margins in this business. As I mentioned, it's been part of a strategy that's been playing out here for some time, and as you think about some of the puts and takes and in particular the ramp down of the gaming business, also keep in mind that that margin profile was significantly lower than even the average margin profile of our overall connectivity business, such that sort of Op gross margin contribution in terms of $ in Q2 and even in Q1 was quite minimal. As Blayne Curtis mentioned earlier, that's one reason why we're seeing as the mix has shifted, we're seeing margin expansion.
We're very comfortable with this mix shift from consumer to high performance and this trajectory we've been on, and we're going to continue to do that and drive value where we can.
Perfect. I guess my quick follow-up, you've mentioned a couple of times about the enterprise side of your storage business growing, specifically on the HDD portion of that. Is there any sizing you could do about that? Just kind of describe how you expect the growth on that side of the business to go going forward, admittedly, as an offset to what would be happening on the client side.
Thank you for the question. We're not going to get into all those detailed % of storage, HDD, SSD, but directionally, when we had our Analyst Day, our enterprise data center business as a part of HDD revenue was really low. Over the last six quarters, we have seen significant growth of that business. It become very meaningful, but bear in mind, it's still a small portion of our HDD business. Going forward, we'll continue to see the growth, but I think we're going to give you directionally where it's going when we have another Analyst Day. Quarter-over-quarter, we're not going to get into the details of the %.
Is it fair to assume that that transition is also accretive to gross margins?
Oh, absolutely.
Perfect. Thank you.
Thank you. Our next question will come from the line of Gary Mobley with Benchmark. Your line is now open.
Hi, everyone. Thanks for taking my question. Congrats on a strong quarter. I guess implicit in your second quarter guidance is that the consumer-related, the game console-related Wi-Fi connectivity business is going to be $7 million in the second quarter. Just to get a sense of the revenue headwind that presents into the second half of the year, could you give us a sense of the rate of decline in that business? Will it go to nothing by the time we get into the second half of the year? Also implicit in your second quarter guidance is that perhaps other revenue increases year-over-year and sequentially at a time when that's supposed to decline. Am I reading that right, and can you explain the movements there?
Sure. I'll give you my take, Gary. Thanks for the question. I'll let Jean add. I think the way you should think about it is that, and again, there's a portion of it I can give you some color on and a portion of it that obviously we're not guiding out into Q3 and Q4, but for the purposes of the gaming trajectory, you should assume that in Q3 the revenue on this is very low, probably $1 million, and just assume it's not there. I would say, though, that I wouldn't assume it's just a net drop. We obviously have other programs in other end markets, and our wireless business continues to remix. For the purposes of if you want to model the gaming, I think that's probably the safest way to do it. Jean, did you want to add?
Yeah, I think on the other, your question about other revenue-
Oh, I see
It is flattish sequentially, I think, year-over-year actually continue to decline, right? The other revenue category is a little bit lumpy quarter-over-quarter. Sometimes you will have a last-time buy of certain products. Directionally, in the longer term, we think the other category is mid to high single-digit year-over-year decline.
All right. Thank you, guys.
Thank you. Our next question will come from the line of Quinn Bolton in Needham. Your line is now open.
Hey. Just first a clarification on the connectivity business. The large OEM that you had expected to ship in April, that's not a gaming customer, correct?
No, that's not.
Yeah.
It's what we call the high performance, like voice-assisted solutions.
Got it. Okay, great. Thanks for the clarification. Just on the SSD business, about this time last year, I think you guys gave us some projection that said the business would go from the low 20% of storage to 25%-30%, and you hit that. I'm just wondering, as we look at fiscal 2019, is it reasonable to assume SSDs can get to, say, 35%-40% of storage by the end of the fiscal year?
Sure, Quinn. We haven't set a target, but you should assume that trajectory that we've been on is going to continue. We'll update the model at another time, but you should assume that, and it may vary quarter by quarter, but that direction isn't changing, that mix between SSD and HDD.
Okay, great. The last question, Matt, just on the automotive Ethernet side, was just wondering for the gigabit Ethernet, can you kind of give us a sense what you see on the competitive landscape? Then are you seeing any demand from customers for faster than 1 gigabit speeds in the autonomous vehicles going forward? Thanks.
Sure, Quinn. We feel very good about our competitive position in gigabit Ethernet. This was a very challenging product to take to production. We announced it a few years ago, but to go from sort of product announcement sample to passing all of the stringent EMC and EMI requirements, was a real challenge, and it was a testament actually to our team here that's got tremendous expertise in this area. So that product, we think, in the context of your other question at the sort of 1 gig node is really where a lot of the volume is going to come. Also, by the way, still on 100 megabit as well. Certainly, there are requirements for multi-gig and even out to 10 gig in automotive, and we're very aware of those.
We're working on those, we think the bulk of the market and the activity we see today is on the current solutions, both for our PHY as well as our integrated switch. We've got obviously the core IP to do all of these solutions, given the scale of Marvell as the number 2 Ethernet supplier in the world and the dedication and focus we have on automotive. We think we're extremely well-positioned across all the various technology nodes, including multi-gig, as you mentioned.
Great. Thank you.
Thank you. Our next question will come from the line of Srini Pajjuri with Macquarie. Your line is now open.
Thanks, guys. Matt, just a couple of questions here. First, on the MOFCOM approval. I'm just wondering, what kind of feedback, if any, you've been getting and what gives you the confidence that it will close, I guess, in mid-year is what you're expecting. Also, if you can maybe talk about the process once you get the approval, how long do you expect it to take for you to close the deal?
Sure. I'll just start off by saying on regulatory, we've gone through CFIUS, obviously. There was a process we went through there and back and forth and active discussion. Ultimately, we received the outcome that we were looking for. There's also a process ongoing with MOFCOM. Everybody can read in the paper every day, there are other events going on at the geopolitical level that are certainly factoring into MOFCOM at a high level. We focus on our deal and providing the information that's required. We continue to believe that the, we know that the overlap between the two companies is very minimal. The strategic rationale makes a lot of sense. We're being very cooperative with everybody involved in the regulatory world. That one, we're just continuing to be responsive and work through the process.
With respect to closing, we have basically from when we receive approval, it's about 2 weeks we have to close. Think of it as whenever we announce that we've got MOFCOM, assuming we get that, then within 2 weeks, we would close the transaction.
Great. Thanks for that color. On networking, obviously you're guiding for a fairly strong quarter despite the ZTE headwind. My question is more about the quarter that you just printed. I was hoping to see a bit more upside there, given the environment and given your new product ramps. I'm just curious as to why we are not seeing a bit more upside in the current quarter. Are there any puts and takes that prevented you from seeing that upside?
Yeah, there's nothing specific other than we were obviously happy to see the 6% year-over-year. The next quarter, you can sort of imply. Obviously with ZTE, it would've been over double digits, and we don't know what's exactly going to happen there. This one's been hard, I think, for us to nail the exact timing on in terms of some of these ramps that we're seeing. But directionally, certainly over the last three, four quarters, we've been pretty happy with the progress on our core business and those ramps. We feel good about our Q2 outlook and obviously, we see that continuing. I can't. Jean, maybe you have something, but.
Yeah.
My view is it was a good quarter.
Yeah, it's great. As Matt mentioned, our switch processor and the PHY actually grew 10% year-over-year. Legacy did decline double-digit year-over-year. We feel like it's a good quarter.
Great. Thanks, Jean.
Thank you. Our next question will come from the line of Harlan Sur with J.P. Morgan. Your line is now open.
Good afternoon. Congratulations on the solid results. We had Western Digital's CEO at our tech conference a couple of weeks back, and given the normalization in flash pricing, he talked about already seeing price elasticity and NAND driving higher attach rates of SSDs to notebook PCs. Last week, we heard a similar thing from Micron at their analyst day. I believe that these two companies are your largest client SSD customers. Is that what is helping to drive your strong SSD controller growth?
Well, hey, Harlan. Nice to hear from you, and thanks for the question. We've had a number of growth factors in our SSD business, even as Jean, I think, mentioned. Across client, across enterprise and data center, even on when we've taken a look at the companies that are also our customers that don't even make the NAND, that are procuring NAND to build their own SSD drives. We see that set of customers also starting to really grow this year because of the increased availability. I think certainly those comments out of WD and Micron, clearly they're our customers, so we're benefiting. I think the other broader theme is that we've seen really nice growth ex the companies that actually make the NAND, which was a big driver for us in calendar 2017.
We see some tailwind in 2018 as NAND loosens and other people can build SSD drives. It's a combination, Harlan, of better market availability and our customers doing well.
Great. Thanks for the insights there. You guys have been benefiting, obviously, from the campus and enterprise segments of the networking market and the nice upgrade cycle that is going on there. One of the faster-growing switch vendors, Arista, seems to have sort of a similar view, and they recently announced their intentions to enter the campus market with a few new switching platforms. I think Juniper also recently announced a focus on this market as well. I'm just wondering if you can discuss switching design wins with other OEM customers in addition to the solid traction with your large networking customer.
Yeah, we can't get into the details by customer, but what we can say is that our engagements on our switches and then obviously our PHYs that attach, have been broad in nature, with U.S. OEMs as well as with Chinese OEMs. You got to remember, too, in all these OEMs in the various geographies, they have multiple platforms, multiple SKUs, and then based on our product offerings across switch, PHY, processor, and other, we've got a wide range of products we sell. Notwithstanding the question about sort of Arista and Juniper, won't go into that specifically, but I will say that our penetration has broadened, and we continue to see ourselves as a broad-based global supplier. We've been saying for a while, we think that the campus and enterprise networks of the world were due for an upgrade.
I think large OEMs have followed suit, and we continue to think we're well-positioned as that trend starts to materialize this year.
Yep, absolutely. Thank you.
Thank you. Our next question will come from the line of Kevin Cassidy with Stifel. Your line is now open.
Hi, this is John Donnelly on for Kevin. Thank you for taking my question. If the trade restrictions continue for ZTE, do you expect to be able to make up that $7 million per quarter by shifting sales to their competitor, or is it kind of being viewed as lost revenue?
Yeah, we're not counting on it, which is why we called it out the way we did. We just decided to be super clear that this was the amount, this is the amount we took out. To the extent that it comes back, it's approximately that amount of revenue that would come back, but timing plays a big role. Then to the extent that it delays and other vendors get share and we're in those boxes, then we may or may not benefit, but it's hard to model. We were just very clear about guiding without it.
Thank you. Our next question will come from the line of Craig Ellis with B. Riley FBR. Your line is now open.
Thanks for taking the question and nice job on the execution. I just have a couple of follow-ups and then a question. The first clarification, Jean, with regard to the gross margin guidance and the portion of the increase that's really cost management and self-help in nature, is that more one-time in nature or are those initiatives things that can continue to bear fruit beyond the fiscal second quarter?
Yeah, that's a great question. I think certainly in Q2, typically, the cost improvement initiative, you see a step-up because it gets included into the standard. As a company, I think we continue to do everything we can to improve gross margin. Certainly in Q3, Q4, you will not see the step-up like we just had in Q2. You should expect us to continue to improve the gross margin just from a cost and supply chain management perspective going forward.
That's helpful. My next follow-up is regarding comments on the repositioning with the connectivity business. Matt, as that portfolio evolves to one that's seemingly more enterprise-centric than consumer-centric, what does the longer-term growth rate of that business look like? I would expect that it would be somewhere above storage, potentially below networking. If you can put any quantitative color on that, it would be helpful.
Sure. Well, Craig, I think the way to think of it is when we did our analyst day, we outlined the different growth rates. Wireless as a market, including consumer and these other types of applications, has a pretty healthy growth rate. Our strategy has been. By the way, we have consumer business. We have no problem with consumer business. A lot of the consumer business we have is in platforms where we can really add value and work closely with the customer on the dimensions that I outlined. Consumer will always be a part of that portfolio, albeit, as you said, the pivot has been more to enterprise and automotive and things like that.
Our focus has been, although the top line has grown actually in connectivity, if you've looked at it's been during a period where we've actively managed this transition, which is really focusing on profit and margin improvement, not so much on the top-line improvement. As we look going forward, you should expect that that's going to continue, that we want to make sure that this thing is a solid contributor to the company, we're being selective in where we engage and develop products. From a growth rate perspective, although the market may be healthy, you should think of this as a slower grower, with improving profitability along the way, such that the profit dollars grow at least as fast or faster than the market.
That makes sense. If I could just ask one question related to the deal, it's not related to Cavium's numbers, in your prepared remarks, you indicated that integration planning was going very well. I was just hoping you could elaborate on that, given that that has a significant impact on the way integration actually comes through when you get to that point. Thank you, Matt. Thank you, Jean.
Sure. Happy to comment on the integration, Craig, and thanks for the question. The way that we've been running this, first of all, the leadership has been outstanding in this. We've got a leader from Cavium, their COO, our head of operations co-leading the integration. It's extremely thorough and systematically managed. The level of detail and planning that's gone on across our IT systems, sales force planning, operations and manufacturing, and one that's been challenging, and we got to make sure we get it right, is the R&D integration. What I can tell you is on all of those various tracks, the executives from the merged company have put together extremely detailed plans, which include synergy capture, include time frames and timetables with commitments. I'm obviously very involved in this whole process.
From where we were back when we announced it and saying, "Look, here's the range that we think, and here's what we expect we can achieve," having been through this now for the last many months, we're extremely confident in our numbers and our ability to execute those in the manner that we said due to the detailed planning and the buy-in from the senior leaders of both companies who are going to be involved in making all this happen.
Thank you.
Thank you.
Thanks.
Ladies and gentlemen, we only have time for one more question, so our last question will come from the line of Mark Delaney with Goldman Sachs. Your line is now open.
Good afternoon. Thanks for taking the question. I had a question on the networking segment. I think on the last earnings call, the company had talked about some of the legacy networking products getting pushed into the first half of fiscal 2019. Can you talk about to what extent you were able to ship those in either the April quarter, or assuming that you will ship those in July, and if those are coming through in the first half, is there any step down in those more mature products that we need to be cognizant of in the second half of fiscal 2019 when we're doing our modeling?
Sure, Mark, thanks for the question. You're right. We talked about last quarter that we had some specific pushouts in this NPU area, and those pushouts we said would materialize or return back to their run rate in the first half of fiscal 2019. That did come back somewhat in Q1, and we expect it to be back at its old run rate roughly in Q2. Think of it as bottoming in Q1. We didn't get the full recovery in Q2. We got a little bit, and then we'll get a little bit more in Sorry. Yeah, Q4 was the low point. Q1 came back a little bit, and then we'll get some more in Q2 such that sort of the Q3 to Q2 compare is about the same.
That's helpful. My follow-up question is on preamps. Matt and Jean, you both talked about that as an opportunity. Can you just give us a rough sense of the size of the preamp business at this point?
Yeah, very small today. There's a number of engagements that we have on a number of different drive programs at multiple OEMs. Those really are going to the way that that business works is there's typically a dedicated preamp product per drive, per program, and each of those is going to ramp at its own pace. I would model very small revenue today. That's something that'll be growing throughout the calendar year, and ideally, we have an analyst day, and we can give a little bit more of an update at that point. But it continues to make progress, and we do think that it incrementally will help us as it grows to offset some of this secular decline we see on the controller side in client. By the way, those preamps that we have are targeted both for client and for enterprise and nearline applications.
In many cases, they're paired directly with our next chipsets that are coming out. We have decent line of sight on a number of these programs on the timing.
Thank you.
Thank you. Ladies and gentlemen, this concludes our question and answer session for today. Now I'll hand the call back over to Mr. Peter Andrew, Vice President of Treasury Investor Relations, for some closing comments and remarks. Please proceed.
Okay. Well, thank you everyone for joining us today, and we look forward to talking again next quarter. Thank you and goodbye.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day.